Brussels, 05/12/2013 (Agence Europe) - The European Central Bank (ECB) says that inflation will remain low in the eurozone in 2014 and 2015, but that this is in line with the ECB's mission and the threat of deflation was not acute.
In its December economic forecasts, the ECB expects inflation in the eurozone to fall from 1.4% in 2013 to 1.1% in 2014 and then to rise to 1.3% in 2015. “Inflation is expected at around current levels in coming months”, said the head of the ECB, Mario Draghi, although the figures have been revised down by 0.1% for 2013 and 0.2% for 2014 on the September forecasts, but he says that the medium- and long-term inflation forecasts remain in line with the ECB's mission of keeping inflation below but close to 2%.
The ECB says the inflation risks are balanced between commodity prices and indirect taxes on the upside and a weak economy on the downside. Aware of the risks of a long period of low inflation, the ECB says it is “ready to act” if it feels it is necessary.
Draghi says the situation in the eurozone shows that the decision to cut interest rates to a record low in early November was fully justified, as shown by market indices and polls of economic operators (see EUROPE 10959). On Thursday, none of the members of the ECB's Governing Council requested a new rate cut.
Monetary policy takes time to filter through to the real economy so inflation will remain low and then gradually rise. Draghi said: “The length of time depends on the state of banks and private sector balance sheets. The longer deleveraging by both actors goes on, the longer monetary policy takes in terms of time. That's why the Asset Quality Review is so important” before the SSM comes on stream in November 2014. Draghi said the situation in the eurozone is quite different from what it was in Japan.
The ECB expects the eurozone to remain in recession in 2013 (with GDP falling by 0.1%) before rising slightly in 2014 (by 1.5%).
LTRO. Asked about the option of a new LTRO programme, Draghi said that it had been used because the level of uncertainty had been very high, with very high public and private debt maturity dates. “Today the level of uncertainty is considerably lower”, he said, noting that the “use of liquidity was mostly for buying government bonds. Not much of it found its way to the economy. If we launch something similar, we want to make sure it will be used for the economy and not used to subsidise capital formation by the banking system under carry trade”. Draghi said work was ongoing at the ECB on this front, pointing out that it can be seen from the example of the United Kingdom (“Funding for Lending”) how complex this is, and it's even more complex among 17 or 18 countries. (MB/transl.fl)